South32 slumps to annual loss, slashes dividend, as commodity prices bite
South32 slumped to an annual loss and slashed its dividend after commodity prices pummelled its bottom line.
South32 looks set to walk back its commitment to metallurgical coal as a key plank of its future growth, with chief executive Graham Kerr downplaying the likelihood the company will commit to a new coal mine in Queensland.
Mr Kerr said on Thursday base metals was the firm focus of its plans to replace its ageing operating assets with growth prospects, telling The Australian the company had “no interest” in the two coking coal mines BHP hung a sale sign over this week when it announced plans to sell out of its BHP Mitsui Coal (BMC) business.
“BMC tends to be lower quality coking coal, not something that’s in our suite of attractive commodities,” he said.
And the South32 boss told analysts he was not “super excited” about the likely returns from building a new metallurgical coal mine in Queensland’s Bowen Basin, where the company is due to make a final investment decision early next year.
South32 bought half of the Eagle Downs coking coal project from Brazil’s Vale in 2018, paying $US106m ($148m) upfront and agreeing to deferred payments worth another $US27m. At the time Mr Kerr said the mine – already fully permitted and partially built by its previous owners, but mothballed in 2015 when coal prices fell and a major contractor went bust – was an “attractive development option” to add to South32’s coking coal presence.
But, as the company nears completion of a final feasibility study on the project, with Chinese steelmaking giant Baowu as the other half-owner, Mr Kerr said he did not want to prejudge the outcome of the study but he was not sure the commercial case for the mine would stack up.
“To date I haven’t seen enough financial attractiveness to say we’d want to invest in it, but the study is not finished,” he said.
“My indication was that in the short term the met coal price is under some pressure, some other projects are getting built, the returns I’ve initially seen don’t super-excite us – but there’s still time for that to be finalised. I’m slightly pessimistic but if the team can demonstrate it generates the kind of returns we’re looking for, we’ll look at it.”
On Thursday South32 slashed its full-year dividend after slumping to a $US65m net loss for the year on the back of tumbling commodity prices and a writedown of the value of its Tasmanian manganese smelters, sold this month to Sanjeev Gupta.
The WA headquartered mining major will pay a US1c a share final dividend, down from US2.8c at the same time in 2019, saying the payout represented 77 per cent of its underlying earnings in the second half of the financial year.
South32’s final result was hit by $US115m in restructuring and impairment charges, largely focused on its manganese smelters.
It booked a net loss of $US65m for the financial year, against an after-tax profit of $US454m the previous period, as revenue across its global mining operations fell 16 per cent to $US6.08bn.
Earnings before interest and tax plunged 71 per cent to $US261m, with the company saying underlying EBIT was also down sharply, to $US446m, from $US1.44bn the year before.
Mr Kerr said South32 had delivered a strong operating performance, with annual production records at its Australia Manganese ore, Hillside Aluminium and Brazil Alumina facilities.
But he told The Australian he expected the volatility on commodity markets to continue for the next year as global economies struggled with the impact of the coronavirus crisis.
“China has shown it can be done very quickly, they’re coming out of the pandemic quicker than people expected – but that’s been done by state-led investment in infrastructure,” he said. “They haven’t necessarily seen the recovery in consumption and services yet.
“The US and Europe are running a little bit slow at the moment. And obviously India is the one at the moment that we think is increasingly constrained by weak fiscal support and rising infections still.
“It will be interesting to see how India comes out. Because India and China will drive a lot of the commodity prices globally, so we need to watch that.”
South32 shares closed down 1c, or 0.5 per cent on Thursday, at $2.14.